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March 28, 2006

Big Tobacco wins payment dispute

by Sam Savage

By Joan Gralla

NEW YORK (Reuters) - An arbitrator ruled that cigarette
makers lost market share as a result of a settlement reached
with U.S. states, boosting the chances they can reduce the $6.5
billion payment they owe next month, according to a copy of the
decision obtained by Reuters on Tuesday.

U.S. states who signed the accord have said they would
fight in court if they lost. New York state this month has
already won one such court battle, according to The Brattle
Group, the arbitrator who wrote the decision.

But the states now are trying to negotiate a settlement,
according to the National Association of Attorneys General.

The states argue they met another requirement under the
pact because they collected funds from tobacco companies that
did not sign it.

Big Tobacco in 1998 agreed to pay states $206 billion to
help pay for the costs of treating ailing smokers. Their next
payment is due in mid-April, and several cigarette makers want
to withhold about $1.2 billion because sales have dropped,
partly because prices rose, discounters rushed in and the
number of smokers, on a per capita basis, has fallen to levels
last seen in the late 1930s.

States and municipalities around the nation have sold
nearly $32 billion of bonds backed by the payments from
cigarette-makers.

Connecticut Attorney General Richard Blumenthal vowed to
force the cigarette makers to pay in full.

"I will stop Big Tobacco from shamelessly shirking its
obligations under the settlement agreement," he said.

David Howard, a spokesman for RJ Reynolds Tobacco Co.
Inc.,, which makes Camel cigarettes, said: "Certainly we're
pleased with the ruling confirming the preliminary
determination that the disadvantages of the master settlement
agreement were a significant factor of our market share loss."

Tobacco companies argue that non-signing companies, often
discounters, grabbed 8 percentage points of market share
between 1997, the year before the pact was sealed, and 2003.

They can cut how much they owe the states if their market
share falls more than 2 percent a year because of the accord.
Cigarette-makers say that big of a drop occurred in 2003.

The arbitrators noted a New York state court on March 13
disagreed with their preliminary finding that the settlement
caused the tobacco firms' market share to fall by 2 percent.

Calling themselves the "firm," the arbitrators wrote: "The
Court found the effect of the firm's interpretation related to
the two percentage points 'illogical and unintended'."

As a result of the court decision, New York state asked for
a declaratory judgment in its favor, the arbitrators said.

Their report added: "The firm is not persuaded by the
Court's logic," explaining they do not agree that under the
settlement, the first 2 percent of any market share drop caused
by the settlement "were intended to be ignored."

Iowa Attorney General Tom Miller and Idaho Attorney General
Lawrence Wasden, who lead the National Association of Attorneys
General's Tobacco Committee, said they were confident they can
negotiate a deal. They said: "The settling states are engaged
in discussions with the major manufacturers to ensure that the
participating manufacturers make full payments of the amounts
due on April 17, and we expect those negotiations to be
successful."

Robert Campagnino, a Prudential Equity Group analyst who
follows tobacco companies, said the negotiations were likely to
be successful though the ruling could trigger a wave of
litigation, as states depend on the tobacco settlement funds.

"A great deal is at stake here, including what has become a
cozy relationship between the states and the tobacco industry,"
Campagnino said. "Ultimately, we suspect that some sort of
negotiated agreement will be the outcome - sort of a settlement
of the Settlement."

He said the decision is unlikely to provide a material
benefit to the tobacco companies in the foreseeable future.

(Additional reporting by Brad Dorfman in Chicago and Peter
Kaplan in Washington)